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Do I need insurance?

I was recently asked an excellent question about private health insurance. But the more I wrote about the topic, the more I realised I had to say about insurance in general. So let’s take a look at the thrilling, wonderful world of insurance more broadly (ha!), before we get down to private health cover in my next post.

What is insurance?

Insurance, according to Investopedia, “is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.”

In other words, insurance is a gamble. The insurance company (like the casino) is betting they won’t have to pay out more to you than you pay them. You, on the other hand, are betting that you will require (and receive) more value (in health services, in replacement of goods or vehicles or luggage or income – whatever you are insuring) at some point in time than the amount you have already put in. If you were 100% confident that you would never need more than the cost of the premiums, you would probably self-insure instead. Insurance can give you peace of mind in that you don’t have to be 100% confident of not requiring these services.

Types of insurance

There are three major categories of insurance: private, public, and self insurance. Which are available to you will depend greatly on the type of risk (e.g. health, automobile, home and contents), where you live, and of course, how much money you have to spend.

Private insurance

Private insurance is a contract taken out by an individual with an insurance company. In Australia, taking out optional private health insurance would be one example of private insurance. You pay a certain amount in premiums for a certain level of cover.

Public insurance

Public insurance is a form of coverage made available, usually by government services, to all citizens. In Australia, Medicare would be an example of this. You may have to pay a Medicare levy, but everyone is entitled to the same level of cover under Medicare, regardless of whether you can afford to pay anything into the system or not.

Despite universal healthcare or ‘socialised’ medicine being mentioned frequently in the news, public health care is far from the only form of socialised service in most developed countries. Consider the police, or the fire brigade. I’ve never heard anyone suggest we should all pay separate police subscriptions. Or fire brigade membership.

If someone is robbed, it makes sense that we should want the police to investigate. Not just to retrieve their goods, but to hopefully prevent further crimes which might affect us.

If someone’s house is burning down, it makes sense that we should want to put it out. Not just for their sake, but so our own properties don’t catch on fire.

Likewise, if someone is sick, we should want them to get treatment not only so they don’t suffer, but to prevent the spread of disease.

In this way, you are probably already a beneficiary of many public insurance schemes you haven’t even considered yet.

a) take out a travel insurance policy. This would be a form of private insurance, where you are pooling your risks and payments with other travelers.

b) decide that, as a multi-billionaire, you don’t need to take out a travel insurance policy as you can bear any cost yourself. This would be a form of self-insurance.

c) forget to take out a policy. This would also be a form of self-insurance. Even though you didn’t intend to bear all risk and responsibility all by yourself, your lack of private or public coverage (because your home country healthcare won’t apply) means you will have to anyway.

The takeaway message here is that for any given risk, if you do not take out an individual policy and are not covered by public insurance, you are self-insuring by default. Whether or not you actually can afford to.

Self-insurance makes a lot of sense for small, unlikely risks. But a lot less sense for potentially devastating risks, like losing your house. Unless, of course, you are extremely wealthy.

Are you already covered?

Just because you haven’t taken out a private policy against a certain risk doesn’t necessarily mean you’re not covered. Before deciding to pay for private coverage, you should always check what levels of cover you may already have. Then you can decide whether to replace or supplement them.

Start with your government. As we’ll detail in the next post, many citizens already have access to public healthcare systems. Then…

Check with your employer or union. Some employers offer special rates for employees on healthcare or public liability, or even insure them.

Check with your bank. If you have a credit card, you may already have cover for services purchased through it, like hire cars or travel expenses. This may impact the level of auto insurance or travel insurance you require.

Check with your superannuation fund. You may already be paying for death and disablement insurance or income protection. If you have more than one fund, you might even be paying for multiple policies!

Check with your landlord or owner’s corporation. If you’re renting, or if you own an apartment, the building and its fixtures may already be insured by the landlord or owner’s corporation. Rather than home and contents, you may only require insurance for your own belongings.

Depending on where your live and what you do, there may be many more.

If you’ve looked carefully and determined that you aren’t already insured, or the coverage you are provided with is insufficient, there are three points to consider…

Questions to ask

The central question in relation to any sort of risk is ‘how much could it cost me?’ Weigh this up in relation to a) the worst possible outcome of the event, b) how likely the event is to happen, and c) how much money you have on hand.

A risk worth taking?

Consider for example the ‘extended warranties’ offered by many electronics retailers. These are often over and above the standard (usually 12 month) manufacturer guarantee.

A tablet retailing for $197 at Harvey Norman will jump in price to $326 with the addition of 3 years’ ‘product care’. That’s $129 worth of insurance, or $43 a year.

What is the worst that would happen if your tablet stopped working? You wouldn’t have a tablet anymore. It’s not like losing a limb. If you were using it for work purposes or otherwise needed one, you might have to buy another. And given the cost of electronics consistently decreases, in 6 months’ time, that $197 tablet might only cost $150, or $100. If you bought second hand, you could pick one up for a pittance. In fact, ebay currently has a refurbished tablet of the exact same make and model for $79. That’s $50 less than you’d pay in insurance at Harvey Norman.

How likely is the event to happen? Only you know how rough you are on your technology. I’ve had the same eReader for 10 years now, and my phone is now three. My phone before this one (a beautiful Firefox phone!) broke in a matter of weeks after I dropped it. But you can take steps to mitigate this. My electronics that have lasted have generally lasted because I’ve protected them. Not with extended warranties, but with screen protectors and cases. And these can be purchased inexpensively online. (My Firefox phone was an exception – no one seemed to make them). A $5 case and a $1 screen protector are much more affordable than a $129 policy.

How much money do you have on hand? I’d bet most people who can afford to buy a tablet can afford to replace it. If you’re tossing up whether to take out a $129 insurance policy, you obviously already have nearly two-thirds of the replacement cost of the device itself. It shouldn’t take too long to find the rest.

When it comes to your health…

On the other hand, when it comes to your home, or your health, these questions can have very different answers. With health care, the worst that could happen, physically, is of course death. Financially, if you live in a country like America (and of course, there is no country like America!) healthcare costs could bankrupt you. The likelihood of you needing hospitalisation will of course depend on your existing conditions, age, general health and fitness, future plans, risky activities etc. But few of us could pay for a major operation out of pocket.

Think of the travel example above. Few can afford the enormous fees (tens, hundreds of thousands, possibly even more) involved in airlifts and international medical treatments and repatriation. For the sake of saving a few hundred dollars, the risk simply is not worth it. (I always say, if you can’t afford travel insurance, you can’t afford to travel!)

Don’t be scared

It is precisely the very serious nature of illness (and indeed, death) which allows private health and the euphemistically titled ‘life’ insurance companies to prey on our worst fears. TV ads featuring distraught children on swings with no one to push them. Widowed mothers pouring over stacks of bills all marked in red.

In the next post, we’ll take the example of health insurance in Australia to explore how you can look at these often emotionally-charged and complex decisions from a more logical, calm perspective without it becoming overwhelming or scary.